How Trade Patterns Influence the Global Development Gap

Updated on July 2, 2016

Trade is one of the most important processes in affecting the development gap; when used correctly, it can improve the quality of life for millions of people; for example, fair trade focuses on cutting out the middle man, so producers in less economically developed countries (LEDCs) receive higher wages.

The geography of cocoa and chocolate. | Source

However, trade can also prevent entire countries from developing; the World Trade Organisation (WTO) aims to abolish global barriers to trade, especially import tariffs, but has failed to remove the European Union's Common Agricultural Policy (CAP), which subsidises European farmers, allowing them to undercut producers in less economically developed countries (LEDCs), who should have the advantage of lower production costs. Western farmers can therefore flood the markets of developing countries with their goods, thus reducing wages for impoverished farmers.

Simultaneously, the European Union imposes high import tariffs on manufactured goods: 15% for processed cocoa butter, but 0% for raw cocoa beans. This prevents LEDCs from manufacturing goods; they cannot benefit from any added value, and have to import the processed materials back from MEDCs, hence they have poor terms of trade, and have to resort to loans for any development. This continues the debt trap, thereby maintaining the development gap.

On the other hand, the flow of resources from the "periphery" to the "core", as described by dependency theory and Immanuel Wallerstein's world-systems theory, has enabled some countries to develop rapidly, and even enter the core, e.g. South Korea.

China has also developed primarily by attracting foreign direct investment, in the form of multinational corporations, which manufacture goods in China, and export them globally, and even though China's economy may only receive 1% of the sale price of an iPad manufactured there, the sheer size of the country, together with a lack of environmental protection and workers' rights laws, has enabled China to challenge the USA for superpower status.